SHAREHOLDERS’ EQUITY

PROF. PAULINE KRISTINE M.

FULGENCIO, CPA, MBA
Corporations

 A corporation is an entity which is owned by

its shareholders and which raises equity
capital by selling shares of stock to
investors.
 Corporation Code of the Philippines defines a
corporation as:
 Artificial being created by operation of law
 Having right of succession, and the powers,
attributes, and properties expressly authorized by
law or incident to its existence
 It has a juridical personality*
 Which is separate and distinct from owners
Corporations

 Articles of incorporation and by-laws

 Shareholders elect the members of the BOD
 Each share of stock represents a fractional
interest in the issuing company.
 Stockholders expect to receive dividends
or to earn capital gains on their investment.
 Dividends are distributions of corporate
assets, usually cash, to shareholders.
What is Shareholders’ Equity?

 Is the residual interest of owners in the net

assets of a corporation measured by the
excess of assets over liabilities
 It can be simply stated as A – L = SHE
Elements constituting SHE

Philippine Term IAS term

Capital stock Share capital
Subscribed CS Subscribed SC
Common stock Ordinary share capital
Preferred stock Preference share capital
APIC Share premium
Retained Earnings (deficit) Accumulated profits (losses)
RE appropriated Appropriation reserve
Revaluation reserve Revaluation reserve
Treasury stock Treasury share
Robles and Empleo

 Contributed (Paid-in) Capital

 Retained Earnings
 Other Comprehensive Income
 Revaluation Surplus
 Unrealized gains / losses on financial assets at fair
value through OCI
 Foreign currency translation adjustment gains and
losses
 Actuarial gains and losses on defined benefit plan
Contra SHE accounts:
 Share capital subscriptions receivable
 Treasury shares
Contributed Capital (Paid-in Capital)

 Amount invested or contributed by owners

 Composed of share capital and APIC
 SC – contribution equal to par or stated value
 APIC – contribution in excess of par or stated value
of SC
 Can share capital be issued at a discount?
Yes or no?
 No. Corporation code provides that share
capital cannot be issued less that par or
stated value.
 However, treasury shares may be issued at
less that par or stated value w/o violating the
legal provision
Legal Capital

Peference share, P100 par value P300,000

Share premium – preference P100,000
Ordinary share, P20 par value P500,000
Share premium – ordinary P250,000
Subscribed ordinary share P50,000
Retained earnings P190,000
Notes Payable P400,000
Subscription receivable – ordinary P40,000
The company declared a bonus issue of P50,000

How much is the legal capital? P900,000

Legal Capital

If issued at par:
 Share capital
 Subscribed share capital
If issued at stated value:
 Share capital
 Subscribed share capital
 Paid in capital in excess of stated value

Share dividends declared is also part of the

legal capital
Par value and No-Par value

 Par value share capital

 Fixed per share amount printed on stock certificate
 Par value establishes nominal value per share
 Minimum amount that must be paid in by the
shareholder
 No-par value share capital
 One with no amount printed on stock cert.
Why a company issues no par shares

 Corporations do this because it helps them

avoid a liability to stockholders should the
stock price take a turn for the worse.
 For example, if a stock was trading at $5 per
share and the par value on the stock was
$10, theoretically, the company would have a
$5-per-share liability.
APIC may arise from any of following items
except:
A. Resale of treasury shares
B. Retirement of treasury shares
C. Quasi-reorganization
D. Issuance of shares at no-par, no-stated value

 It can also arise from :

 Stock recapitalization
 Quasi reorganization
 Bonus issue
 Issuance of detachable share warrants
Accounting for Share Capital

1. Share capital issued for cash

 If issued at par - proceeds are credited to share
capital account equal to par w/ excess being
credited to the premium
 When no-par and no stated value – all proceeds
shall be credited to share capital account*
 When no-par has stated value – excess proceeds
over stated value is credited to share premium
Ordinary Share (Common Stock)

 Represents residual ownership interest in

the corporation
 Bears ultimate risk of loss and receive the
benefits of the success of the corporation
 Controls the management of the corporation
 O/S holders’ basic rights are:
 Share in earnings of corp.
 Vote in election of BOD and determination of
certain policies
 Pre-emptive right
 Share in net assets upon liquidation
What are the 5 features of Preference
Share?

Cumulative
C allable
C onvertible
R edeemable
P articipating
Preference Share (Preferred Stock)

 Common features attached to P/S:

 Cumulative – dividends in arrears must be satisfied
first before dividends O/S holders
 Participating – fractional share in residual income
after distributing dividends to O/S holders
 Convertible – option to convert P/S to O/S
 Callable – corporation can reacquire or retire share
 Redeemable – same as callable but this, w/ the
option of the shareholder
 Does not have a voting right
Accounting for Share Capital

 Issued 100,000 shares, P100 par value for

an acquisition of land in with a historical
price of 12M last 5 years, there was no ready
market for the land. Shares were actively
traded at P130/share How much should land
be debited?
 12M or 13M?
 Answer is 13M.
Accounting for Share Capital

2. If share capital issued for non cash

consideration to entity other than employee:
 Measured at: (order of priority)
1. FMV of property or services received
2. Fair value of share capital issued (if there is no
market price of non-cash item received)
 If shares are issued for employees for goods or
services received, IFRS 2, share based payment
requires that:
 Issuance should be recorded at fair value of equity
instruments issued
 Any excess of FV over par value is credited to share
prem.
Accounting for Share Capital

 If shares issued for outstanding liabilities of

issuer and settlement is not in accordance w/
original terms of debt:
 Fair value of equity instrument shall be measured
as basis of measurement
 Difference between fair value of shares granted
and carrying value of liability set off is taken to
profit or loss.
Share Capital Sold on Subscription

 Certificates of share capital are not issued

until subscriber has completely paid the
subscription price
 Date of subscription:
Cash (for DP) xx
Subscription receivable xx
Subscribed share capital (@par) xx
Share premium xx
 A deduction from SHE, or may be shown as
current asset if expected to be collected
within one year or less.
Delinquent Subscriptions

 When subscriber defaults in payment of

subscriptions
 Sue the subscriber
 Sell delinquent shares at public auction to highest
bidder.
 A corporation offered the 1000 shares, 100 par
,delinquent shares at a public auction. Bonnie made a
bid for 800 shares. Clyde made a bid for 900 shares.
Jack made a bid for 600 shares. Who is the highest
bidder? Bonnie, Clyde, or Jack?
 Answer is Jack. The highest bidder is the one who is
willing to receive least number of shares and pay all
cost related to defaulted shares.
Delinquent Subscriptions Journal Entries

Receivable from highest bidder xx

Subscription receivable xx
Cash xx
#
Cash xx
Receivable from highest bidder xx
Delinquent Subscriptions

 If there is no bidder, the delinquent shares

will be issued in the name of the corporation
and will be placed in treasury.
 Cost assigned to TS is the cancelled balance
of receivable from highest bidder
Treasury shares xx
Receivable from highest bidder xx
#
Subscribed ordinary share capital xx
ordinary share capital xx
When two classes of shares issued

 When two classes of equity securities are issued for

single payment, lump sum price is allocated among
classes of securities issued based on their relative
market values
When two classes of shares issued

 To illustrate, assume that XYZ corporation issued for a lump

sum price of P178,000, 1000 ordinary shares with a par
value of P100 and 500 preference shares with par value of
P50. On the date of issuance, XYZ’s ordinary shares were
selling at P135, while its preference shares were selling at
P90. Total market values are as follows:

Class No. of shares Fair value/share Total fair

values
Ordinary 1,000 P135 P135,000
Preference 500 90 45,000
P180,000
Allocated to ordinary shares P178,000x135/180 P133,500
Allocated to preference shares P178,000x45/180 P44,500
When two classes of shares issued

 If only one share has an available fair market value,

use bifurcation
 Assume in last example that there is no market value
for preference shares. Allocation is made as follows:

Total lump sum price P178,000

Less: market value of O/S 135,000
Issue price of P/S P43,000

 Entry for issuance:

Cash xx
Ordinary share capital xx
Share premium – ordinary xx
Preference share capital xx
Share premium – preference xx
Share Issue Costs and Stock Assessments

 Transaction costs of an equity transaction are

accounted for as a deduction from equity by a
charge to APIC ( Share premium ) pertaining
to that issue.
 If there is no APIC pertaining to that issue,
share issue costs are recorded as expenses
 Transaction costs that relate to an issue of a
compound financial instrument ( e.g. bonds
w/ warrants ) are allocated to the liability and
equity components of instrument in
proportion to the allocation of proceeds
Share Issue Costs and Stock Assessments

 Transaction costs accounted for as a

deduction from equity in the period is
disclosed separately in the statement of
changes in equity under IAS 1 Presentation
of Financial Instruments
Share Issue Costs and Stock Assessments

 Philippine interpretations committee (PIC) enumerates

what types of costs are directly deducted from equity
and what types are expensed:
 Costs recognized as deductions from equity:
 Documentary stamp tax and other percentage tax imposed in public
offerings of shares
 Underwriting costs
 Newspaper publication fees relating to issue
 SEC registration fees for new shares
 Cost recognized in P/L
 Public relations consultant’s fees
 Road show presentation
 Stock exchange listing fees
Share Issue Costs and Stock Assessments

 Costs allocated between equity and expense (related

to offering of shares)
 Audit and other professional advice
 Opinion of counsel and tax opinion
 Fairness opinion and valuation report
 Prospectus* design and printing

*Prospectus - a printed document that advertises or describes a school,

commercial enterprise, forthcoming book, etc., in order to attract or inform clients,
members, buyers, or investors.
Share Issue Costs and Stock Assessments

 Share assessments usually represent

additional contribution from shareholders.
Share assessments are credited to share
premium (APIC).
 However, if the share assessment is levied
on the shareholder because share capital
was originally issued at a discount, the
assessment will be recorded by debiting cash
and crediting discount on share capital
Reacquisition of Share Capital

 Reasons why a company reacquires its own

shares:
 Improve EPS
 Increase ratio of debt to equity
 To obtain shares for share option plans and
conversion of other securities
Reacquisition of Share Capital

 A treasury share is a corporation's own share

that has been reacquired after having been
issued and fully paid but not retired
 Is treasury share an asset? Yes or No?
 No. when a corporation buys back its own
outstanding shares, it reduces its
capitalization but it has not acquired an
asset. (Robles & Empleo)
 A holder of a treasury share does not have a right:
 to vote
 to exercise pre-emptive right
 to receive cash dividends and receive assets upon
liquidation
Reacquisition of Share Capital

 1,000 shares of P100 par ordinary shares reacquired

@ P150 per share. What will be the result of the
reacquisition? A gain, or a loss, or no gain or loss?
 No gain or loss. No gain or loss is recognized in profit
or loss on the purchase, sale, issue, or cancellation of
treasury shares. The consideration paid or received
shall be recognized in equity
 Upon acquisition, treasury shares is recorded at cost,
irrespective whether these are acquired above or
below the par value
 1000 shares of P100 par ordinary shares
reacquired @ P150 per share
Treasury Shares 150,000
Cash 150,000
Purchase of Treasury Shares

 Treasury shares sold at a price higher than

cost will result to an APIC from treasury
shares
 Treasury shares sold at a price lower than
cost will result to a debit in retained earnings
if the APIC from treasury shares wasn’t able
to absorb the deficiency.
Purchase of Treasury Shares

 Assume 400 of the 1000 shares (P150 cost)

mentioned before where subsequently sold at P160
per share and the remaining 600 were sold at P140
per share. The resale of the 400 shares at P160 is
recorded as follows:
 Resale of 400 shares @ P160
Cash 64,000
Treasury Shares 60,000
Pain in Capital from Treasury Shares 4,000
 Resale of 600 shares @ P140
Cash 84,000
Paid in Capital from Treasury Shares 4,000
Retained Earnings 2,000
Treasury shares 90,000
Limitation of Treasury Shares

 A company can only reacquire or repurchase

treasury shares:
 Provided that the corporation has unrestricted
retained earnings in its books to cover the shares
to be purchased or acquired
 Thus, a Treasury share amounting to
P150,000 must have a support in the
unrestricted retained earnings of P150,000
Retirement of Treasury Shares

 Assume that an enterprise acquires 1,000 of

its own P100 par value preference shares.
These shares were originally issued at P110.
 At a retirement price of P105 per share, there
will be no credit to APIC from retirement of
P/S. True or False? False.
 At a retirement of P120 per share, there will
be a debit to retained earnings account. True
or False? True
Retirement of Treasury Shares

 A retirement price lower than price of original

issuance(share capital + APIC) will result to a
credit to a Paid in Capital from Retirement
 A retirement price higher than the price of
original issuance will result to a debit in
retained earnings if the APIC wasn’t able to
cover the deficiency on retirement
Donated Treasury Shares

 Treasury shares are occasionally acquired by

donation from shareholders.
 The T/S donated will enable the company to
raise capital by reselling shares.
 Since donated shares are acquired without
any cost, the transaction does not affect the
corporation’s assets/ liabilities, and
shareholders’ equity
 Receipt of donated shares does not affect the
total issued shares but it decreases the
outstanding shares
Donated Treasury Shares

 Transaction is recorded by a memorandum

entry. However, if market price of the share
capital is known at the time of donation,
receipt may be recorded by:
 Debiting treasury shares and crediting donated
capital or APIC for an amount equal to the market
value of donated shares
 If the receipt of donated shares was recorded
by a memorandum entry, entire proceeds
from the subsequent resale of donated share
are credited to donated capital, or PIC from
donated shares.
Donated Treasury Shares

 If donated shares were recorded at market

value at time of receipt, only the excess of
reissue price over the market value is
credited to donated capital, or PIC from
donated shares
Donated Treasury Shares

Illustration: Assume a company received donated shares

of 1000 shares at P100 par, subsequently it was reissued
at P130 per share.
There is no available market Market price for donated O/S
price is @ P120 per share
Entry: Entry:

Memo. One thousand (1,000) Treasury Shares 120k

shares of P100 par value Donated Capital 120k
ordinary shares were
received as donation from
various shareholders
Resale: Resale:
Cash 130k Cash 130k
Donated Capital 130k Treasury Shares 120k
Donated Capital 10k
What is Treasury Share Subterfuge?

 What is the meaning of subterfuge?

 It means to deceit used in order to achieve one's goal.
 The T/S subterfuge occurs when excessive shares are
issued for a property with the understanding that the
shareholders shall subsequently donate a portion of
their shares
 The donated shares may then be reissued at a
discount without any liability on the part of the
shareholder
 Then, the resale or reissue of the T/S donated won’t
be credited entirely to donated capital
 Remedy is to use sales price to correct overstated
assets and capital from the fraudulent act
Recapitalization

 Change from par to no-par

 Change from no-par to par
 Reduction of par value
 Share split
Just compare the debit to
remove the capital and the
credit to replace the old capital.
If debit is greater than credit,
there is a premium and credit is
greater than debit, debit the
Retained earnings account
Watered Share and Secret Reserve

 What is meant by watered share?

 A share capital issued for inadequate or insufficient
consideration
 Consideration received < par or stated value, but
share capital is fully paid
 If share capital is watered, assets are overstated
and capital is correspondingly overstated
Watered Share and Secret Reserve

 What is meant by secret reserve?

 This is the reverse of watered share
 Arises when assets are understated or liabilities
are overstated with a consequent understatement
of capital
 Secret reserve arise from the ff:
 Excessive provision for depreciation, depletion,
amortization and doubtful accounts
 Excessive writedown of receivables, inventories
and securities
 Capital expenditures are recorded as an outright
expense
 Fictitious liabilities are recorded
Share Split or Stock Split

Ordinary share capital, P100

par, 10,000 shares P1,000,000
Share premium 120,000
Retained earnings 300,000
Total SHE 1,420,000

After a 2-for-1 share split is effected, what will be result to the

total SHE? Increased, Decreased, No effect?
Answer is no effect. Share split and reverse share split are
recorded by means of a memorandum entry, the SHE’s
Components and totality is not affected by it.
Share Split or Stock Split

 Stock split is defined as the issuance by an

enterprise of its own ordinary shares to its
ordinary shareholders without consideration
and under conditions indicating that such
action is prompted mainly by:
 A desire to increase or decrease number of
outstanding shares
 Purpose of such action is to effect a reduction in
market price and thereby obtain a wider distribution
and improved marketability of shares.
 This is accompanied by a reduction in the par
value of share capital
Stock rights

 Stock rights are rights are rights issued to

existing shareholders entitling them to maintain a
proportionate interest in the ownership of the
corporation when new shares are to be issued.
 Share issued is proportionate to the
shareholders’ previous holdings ( pre-emtive
right)
 The right prevents the dilution of voting rights
w/o the consent of existing shareholders
 Stock/share rights give the holders the privilege
to purchase the shares at a lower amount than
the prevailing market price of the share
Accounting for Stock Rights

 Assume a company issued 800,000 stock rights to

shareholders permitting them to purchase one share of
P100 par ordinary share at P120 for every for rights
submitted. The company has 800,000 outstanding
shares of P100 par value O/S and decided to issue
additional 200,000 shares.
 Will there be a debit to cash upon issuance of the
rights? Yes or none?
 Answer is none. For the issuance of rights, the
company need not to journalize the transaction for only
a memorandum entry is needed. Also, there will only
be a debit to cash upon only the exercise of the share
rights
Accounting for Stock Rights

 The entry upon the exercise of the stock rights:

Assume 600,000 rights are exercised of the 800,000
stock rights. ( One O/S will be issued for every 4
rights. O/S par is P100, MV is P140 but it only sold the
O/S to the shareholders for P120)
 Entry is:
Cash 18M
O/S Capital 15M
Share prem. – Ordinary 3M

600,000/4 = 150,000 ( number of shares to be issued)

150,000 x P120 = 18M (proceeds of corp.)
150,000 x P100 = 15M ( credit of capital @ par)
Excess credited to share prem. - ordinary
Accounting for Stock Rights

 Assume 200,000 of the 800,000 stock rights

issued expired. At what amount will the stock
rights be credited? The par value, market
value, or zero?
 Answer is zero. Only a memorandum entry is
made upon expiration of stock rights
 “Memo: 200,000 of the 800,000 stock rights
issued to shareholders expired”
Share Warrants Attached to Other Securities

 SW are sold by the corp. for cash in

conjunction with the issue of another security,
usually preference shares or bonds.
 Recall that the purpose of these warrants is
to make the issuance of the P/S shares or
bonds more attractive to investors
Acccounting for SW attached to other
Securities
 When P/S or bonds are issued w/ detachable
SW, proceeds should be allocated to both
P/S or bonds and the warrants based on the
FMV of the two securities @ the time of
issuance.
 Value attached to warrants credited to
Ordinary Share Warrants Outstanding or any
appropriately described account (e.g., Paid-in
capital from Warrants, or Share warrants
outstanding)
 Warrants are reported on statement of F/S as
APIC
Acccounting for SW attached to other
Securities
 Assume a corporation issues 1000 shares P100
preference shares @ P130 per share. A P/S includes
one detachable share warrant that entities the
shareholder to purchase one share of P50 par ordinary
shares @P60 per share. At the time, market values
are as follows:
 P/S without warrant attached – P126
 Warrant – P4
 O/S – P75
assume all the warrants were exercised
Accounting for SW attached to other
Securities
 Entry to record issue:
Cash (1,000 x P130) 130,000
P/S Capital 100,000
Share prem. – P/S 26,000
O/S warrants outstanding 4,000
 Observe that the P/S capital and O/S
warrants outstanding is credited to a different
account upon exercise.
 You need to separate (bifurcation) the value
assigned to the P/S and the SW
Accounting for SW attached to other
Securities
 The allocation was made as follows:
 To P/S:
 130,000 x 126/130 = 126,000
 To warrants:
 130,000 x 4/130 = 4,000
 Entry to record exercise:

Cash 60,000
O/S warrants outstanding 4,000
O/S capital 50,000
Share prem. – ordinary 14,000
Accounting for SW attached to other
Securities
 Assume instead that only 400 warrants
expired of the 1000 warrants attached to the
P/S. What will be the effect of the expiration
to SHE? Increase, decrease, or no effect?
 I think the answer is no effect ( not sure :D )
because the expiration will only result to a
transfer of the attached warrants to APIC, so
warrants were intact in the SHE even before
issuance were made? :D
Accounting for SW attached to other
Securities
 Entry to record the expiration will be :

O/S warrants outstanding (400 x 4) 1,600

Paid-in Capital from Expired warrants 1,600
Share Appreciation Rights

 SAR, what for?

 Incentives in the form of cash to key employees
because of impressive performance of the
company
 In the three kinds of share based payment, this one
falls under the cash-settled share based payment.
The other two are the equity settled and the partly
cash and partly equity settled share based
payment
 Until liability is settled, entity shall re-measure the
fair value of liability at each reporting date and at
the date of settlement with changes recognized in
profit or loss or the period
Share Appreciation Rights

 Three things that you must carefully consider:

 Re-measurement of liability at each reporting date;
 At date of settlement,
 And the changes in fair value that will be
recognized in profit or loss for the period
 Two classifications of SAR (Robles &
Empleo)
 SAR based on number of employees
 SAR based on level of revenue
Share Appreciation Rights

 If SAR is based on number of employees to

be paid, consider these ff. things:
 Number of employees expected to stay each year
until end of vesting period
 The market value and change in market value of
SAR through the years
 The market value of SAR @ each end of reporting
period
 Also, the re-measurements that was in the last
slide
 And more importantly the amount of the intrinsic
value which will be the basis of the payment to the
employees
Share Appreciation Rights

Illustration: Number of SAR is based on number of

employees, use of fair value method

On January 1, 2013, Company Y grants 100 cash

share appreciation rights to each of its 400 employees, on the
condition that the employees remain in its employ at least
December 31, 2015

The following facts are available:

2013 – 20 employees left, 35 expected to leave until 12/13/15
2014 – 15 employees left, revised estimate, 15 expected to
leave until 12/13/15
2015 – 10 employees left
Share Appreciation Rights

The entity estimates the fair value of SARs at each year as

follows:
2013 – P12.40 2016 – P18.00
2014 – P15.20 2017 – P21.00
2015 – P16.40

The market values of O/S are available on the following dates:

1/1/13 – P60.00 12/31/15 – P76.40
12/31/13 – P71.00 12/31/16 – P78.00
12/31/14 – P74.00 12/31/17 – P81.00
Share Appreciation Rights

 Please solve : (if you want to)

 Number of employees that will vest in 2015
 Amount of intrinsic value at date of exercise

 Answers:
 No. of employees ( 2015 : 400-20-15-10 = 355)
 Intrinsic value = (market value of share – strike
price )
12/13/17 MV P81
1/1/13 MV P60
Intrinsic value P21
Share Appreciation Rights

Illustration : Number of SAR is based on level of revenue

Company Z issued SAR to its Chief Executive Officer on Jan.

1, 2013. The SAR may be exercised beginning Jan 1, 2016 provided
that the officer is still tin the employ of the company at the date of
exercise. Each right provides for a cash payment equal to the amount
the share price of Company Z exceeds P50. The equivalent number
of shares for SAR will be based on level of sales of the company during
the year 2015, as follows:

Level of sales Equivalent shares granted

P250M – P400M 10,000
Above P400M – 750M 15,000
Above P750M 20,000
Share Appreciation Rights

Year Level of sales Share price @ end of the year

2013 P350M P74
2014 P410M 85
2015 P750M 95
Share Appreciation Rights

 Please compute: (if you want to)

 Compensation expense in 2013 and 2014 and
2015
 The cash payment for SAR payable in 2016
(assuming it was exercised this year)
Share Appreciation Rights

 Recall that you have to adjust the compensation expense

every year based on the equivalent shares granted and the
difference of the current shares granted and the current
share price @ the end of the year
 You must know how much will be the increase in share price
over the share price of the company
 The entries for compensation expense each year up to the
end of vesting period will be different because of above
circumstances
 Remember that you have to deduct the compensation
expense that vested in the prior year to get the balance of
the compensation expense for the current year using
proration
 Recall that the entry for compensation expense in a SAR is:
Compensation expense xx
Share appreciation rights payable xx
Data needed for computation

1) Compensation expense in 2013 and 2014

2) The cash payment for SAR payable in 2016 (assuming it was
exercised this year)

Level of sales Equivalent shares granted

P250M – P400M 10,000
Above P400M – 750M 15,000
Above P750M 20,000

Year Level of sales Share price @ end of the year

2013 P350M P74
2014 P410M 85
2015 P750M 95
Solution

Compensation expense for 2013:

Increase in share price ( P74 – P50) P 24

No. of shares based on sales 10,000
Total amount of appreciation 240,000
Divided by number of years in vesting period ÷3
Compensation expense, 2013 P80,000
Solution

Compensation expense for 2014:

Increase in share price ( P85 – P50) P 35

No. of shares based on sales 15,000
Total amount of appreciation 525,000
Multiplied by no. of years completed
Over total vesting period x 2/3
Cumulative C/E (2013-2014) P350,000
Less : C/E recognized in 2013 (P80,000)
Compensation expense, 2014 P270,000
Solution

Compensation expense for 2014:

Increase in share price ( P95 – P50) P 45

No. of shares based on sales 20,000
Total amount of appreciation 900,000
Less : C/E recognized in 2013 (P80,000)
Less : C/E recognized in 2014 (P270,000)
Compensation expense, 2014 P550,000

For the payment of SAR, just total the C/E that vested during the years.
It will be the basis of payment of SAR. Entry for payment is:
SAR payable 900,000
Cash 900,000